Summer 2009

Greetings! We bring you research news from the Public Utility Research Center (PURC) at the University of Florida. Our electronic newsletter is designed to keep utility regulators, policymakers, and infrastructure managers informed of our research activities. We invite you to join our mailing list and receive our bulletins by email.

Those interested are advised to apply through GatorJobs. Application deadline: September 14, 2009. View the job announcement.

Newly Updated Body of Knowledge on Infrastructure Regulation Website

What is the state of art in regulatory practices?

How are regulators addressing emerging issues?

Which basic principles can be relied upon to guide regulatory decisions during times of change?

The answers to these questions, and many more, can be found on the newly updated Body of Knowledge on Infrastructure Regulation website. This site is a comprehensive online resource for utility and regulation professionals, policymakers, and academics focusing on regulatory reform and the promotion of strong performance in energy, telecommunications, transportation, and water sectors.

The Body of Knowledge on Infrastructure Regulation contains summaries of regulatory literature, tutorials, self-paced tests, and more than 500 downloadable references for regulatory reform and performance improvements in infrastructure industries. The online glossary has been translated from English into Chinese, French, Italian, Portuguese, and Spanish. The redesigned site also includes a new feature providing guidance on Frequently Asked Questions.

This online resource was originally developed in 2006 and has benefited from funding from The World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF). PURC has led the effort to update content for the new site.

Florida's Plans to Finance New Nuclear Plants

This article examines the strategies used by Florida's electric utilities to finance and build new nuclear power plants and the potential limitations of such strategies. Two companies – Progress Energy Florida and Florida Power & Light – are proceeding with plans to build two units each in Florida. In addition to various federal measures, state policies that help to shorten the regulatory approval process and reduce uncertainty associated with cost recovery can affect construction plans. For example, accelerated cost recovery mechanisms in Florida and other states may allow electric utilities to recover prudently incurred preconstruction and construction costs before a nuclear plant begins to generate electricity.

Despite various government policies to support investments in new nuclear projects, Florida's electric utilities and utilities in other states face numerous challenges outlined in the article. Among the most daunting may be an erosion of public support and the ensuing political backlash once costs for the project are included in customer rates before the plant is commercially viable. Another is the prospect that projected demand will not materialize leaving existing customers to foot the bill for unneeded electric capacity.
Read the paper, "Florida's Plans to Finance New Nuclear Plants" on the Bulletin of the Atomic Scientists.

PURC Visiting Scholar Rui Marques (Right) and a participant from the PURC/World Bank International Training Program on Utility Regulation and Strategy discuss the contracts for two Portuguese cities described in the new paper by Drs. Marques and Berg.

Public-Private Partnership Contracts: A Tale of Two Cities

This paper analyzes regulation by contract in public-private partnerships (PPPs) for infrastructure services. Although the benefits of competition for the market and subsequent regulatory contracts are widely acknowledged, the literature identifies several failures in their design. When considering these limitations, it is useful to distinguish between two different kinds of regulatory contracts implemented: one utilized in a purely contractual PPP (concession) and the other associated with an institutionalized PPP (mixed company).

This study uses contracts in the water sector to describe how major problems tend to arise in the preparation of public tender documents: the "best" bidder is often not the winner. Moreover, risks are not allocated correctly nor is effective monitoring ensured under typical contracts. These problems are present in both developed and developing countries. Comparisons between the two types of contracts show how external regulation can be useful in mitigating contractual problems. This critique of bidding procedures and contract design allows us to develop several implications for policymakers; in addition, the study presents recommendations for improving regulatory contracts.
Read the paper, "Public-Private Partnership Contracts: A Tale of Two Cities".

The Regulator's Challenge: Providing Stability While Leading Change

Now more than ever utility regulators are confronted with conflicting challenges. On the one hand, regulators are responsible for providing a stable, predictable regulatory environment for investors, operators, and customers. On the other hand, regulators must adapt the regulatory system to rapidly changing economic, social, and technological realities. How can regulators turn this conflict into creative tension and avoid paralysis?

This paper examines how regulators need to properly fulfill their technical roles while helping the political process express the values that are to guide policy and also helping the players in the policy and regulatory processes adapt to new realities as they emerge. Finding the nexus of these technical, political, and leadership roles is a central need in regulation. The paper concludes with a description of the perils that regulators face in serving in these various roles.
Read the paper, "The Regulator's Challenge: Providing Stability While Leading Change".

Photo/Inter-American Development Bank

Pro-poor Water Service Strategies in Developing Countries: Promoting Justice in Uganda's Urban Project

Water service to the urban poor presents challenges to political leaders, regulators, and managers. This paper identifies technology mixes of yard taps and public water points (with and without prepaid meters) to meet alternative constraints reflecting population served and investment requirements.

Three investment scenarios have different implications for improving water access to over 400,000 citizens in Kampala. One component, prepaid water meters, can promote social equity and institutional sustainability. If procedural justice is given as much weight as distributive justice in the selection of pro-poor programs, prepaid meters (the ultimate cost recovery tool) can have a place in the investment plan. The study examines how public stand pipes (and a combination of other options) can meet both financial constraints and social objectives. Financial considerations cannot be wished away when seeking effective strategies for achieving the Millennium Development Goals.
Read the paper, "Pro-poor Water Service Strategies in Developing Countries: Promoting Justice in Uganda's Urban Project".

Universal Service Subsidies and Cost Inflation: Evidence from the U.S. Telecommunications Sector

Universal service has been an important theme in telecommunications policy in the United States since the 1970s. A key component of the U.S. system for universal service has been the Federal Communications Commission's (FCC) High Cost Loop Support (HCLS), which is in essence an indirect tax on telecommunications customers for the purpose of providing financial support to small, rural telecommunications companies whose costs exceed the national average.

This paper notes that this HCLS creates a moral hazard problem: companies that receive HCLS subsidies have an incentive to report high costs to the FCC in order to qualify for still higher support payments. The study finds that at least some companies respond to this incentive by overstating their costs, particularly as these costs approach the next higher subsidy cutoff level. Compared to the no-subsidy group, the study also demonstrates that companies at higher cutoff overstate more due to larger marginal benefit and that a regulatory cap on the Universal Service Fund payment actually stimulates the growth of reported loop costs.
Read the paper, "Universal Service Subsidies and Cost Inflation: Evidence from the U.S. Telecommunications Sector".